Buy Rail Vikas Nigam Ltd For Target Rs.35 - HDFC Securities
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Our Take:
Rail Vikas Nigam Ltd. (RVNL) follows an asset light business model, which helps keep its fixed asset part lower, helping it to keep its balance sheet stress free, and resulting in lower inventory days. RVNL is a project executing agency working for and on behalf of MoR (Ministry of Railways) and has a strong order book visibility which is likely to play a key role in the development of railway infrastructure in India. Its experienced management and execution team gives it a competitive advantage which has contributed significantly in increasing its project execution capabilities. It is in the business of executing all types of railway projects including railway electrification, metro projects, new lines, doubling, gauge conversion, workshops, major bridges, construction of cable stayed bridges, institution buildings etc. Revenue from project execution is determined by adding aggregate cost plus margin agreed with MoR. The Government has recently shown intention to introduce competition among PSUs for allotment of work by the Railway Board. This could impact order flows to some extent. The thrust on improving the infrastructure for rail transportation by adding new lines doubling existing lines, electrification, etc. would continue to provide constant flow of business for the company. The company has a robust balance sheet and is available at an attractive dividend yield of ~3.5%. Execution of larger projects on a low base could propel growth higher in coming years.
Valuations & Recommendation:
Looking at the strong prospects we believe the stock is available at reasonable valuation. We feel investors can buy the stock on dips in Rs 29-30 band and add further in Rs 25-26 band for base case target of Rs 33 (7.0x FY23E EPS) and bull case target of Rs 35 (7.5x FY23E EPS). However, stake sale by the Government (to bring down its stake to 75%) would remain an overhang for the stock in the near term.
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